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CONVERTIBLE PROMISSORY NOTE
MENDOCINO BREWING COMPANY, INC.
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Name of Issuer: Mendocino Brewing Company, Inc. Dated: March 2,
2005
Maturity Date: September 1, 2006
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1. PROMISE. Mendocino Brewing Company, Inc., a California
corporation having its principal office at 1601 Airport Road,
Ukiah, California
95482 and any successor (the "Company"), for value received,
promises to pay to
United Breweries of America Inc., a Delaware corporation or to
its registered
successors or assigns (the "Holder") the principal sum of Four
Hundred Thousand
Dollars ($400,000.00) on presentation and surrender of this
Convertible Note
("Note") on August 31, 2006 (the "Maturity Date"), and to pay
interest on that
principal sum at a rate equal to the lesser of (i) one and
one-half percent
(1.50%) per annum above the prime rate offered from time to time
by the Bank of
America in San Francisco, California, or (ii) ten percent (10%).
Interest
payments shall be paid quarterly on the first day of the months
of April, July,
October, and January of each year. The Company may use any of
the funds borrowed
from the Holder for any corporate purposes of the Company,
including paying
obligations owed by the Company to the Holder.
2. FORM OF PAYMENT. All payments under this Note shall be made
in
lawful money of the United States of America. The Company waives
diligence,
presentment, protest, demand and notice of protest, dishonor,
and nonpayment of
this Note.
3. CONVERSION/REDEMPTION/RENEWAL.
(a) The Holder has the right, at the holder's option, at any
time on or after the Maturity Date, to convert all or any
portion of this Note
into fully paid and nonassessable shares of common stock
("Common Stock") of the
Company at the rate of one share of such Common Stock for each
One Dollar and
50/100 ($1.50) (the "Conversion Rate") principal amount of this
Note and any
accrued but unpaid interest. The Holder agrees that all shares
of Common Stock
of the Company, issued by the Company upon the conversion of all
or any part of
this Note shall be restricted securities within the meaning of
Rule 144(a) of
the Securities Act of 1933.
(b) The conversion right set forth in this Section 3 is
subject to any adjustment of the Conversion Rate set forth in
Section 5 and
Section 6, and is only exercisable upon the surrender of this
Note for
conversion at the office or agency to be maintained by the
Company accompanied
by instruments of transfer, in form satisfactory to the Company,
duly executed
by the registered holder. No fractional shares are issuable on
any conversion,
but in lieu of issuing fractional shares the Company shall pay
for such
fractional shares in cash.
(c) At any time prior to seventeen (17) months from the date
of this Note, the Holder may provide written notice to the
Company requiring the
Company to commence repayment of the outstanding principal
balance of this Note,
together with any accrued but
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unpaid interest thereon, to the Holder. In such case, commencing
on the Maturity
Date, Company shall pay the Holder equal monthly installments of
principal,
together with any unpaid interest, over a period of five (5)
years until all
amounts due hereunder shall be repaid in full.
(d) If the Holder does not convert or redeem any or all of
the principal amount of the Note into Common Stock on the
Maturity Date, the
Holder has the right to extend the term of this Note for a
period of time
mutually agreed upon between the Holder and the Company. At any
time during such
extension period, the Holder shall have the right to convert all
or any part of
the outstanding principal amount of the Note plus accrued and
unpaid interest
into Common Stock as set forth in this Section 3. Moreover, at
any time during
such extension period, the Holder shall have the right to
require the Company to
repay all or any part of the outstanding principal balance of
this Note,
together with any accrued but unpaid interest thereon, to the
Holder within
sixty (60) days.
4. COMPANY REDEMPTION. Prior to the Maturity Date, this Note may
be
redeemed by the Company, in whole or in part, at any time after
sixty (60) days
written notice ("Redemption Notice") to the Holder. During such
sixty (60) day
period, the Holder shall have the right to convert all or any
part of the
outstanding principal amount of the Note plus accrued and unpaid
interest into
Common Stock, as set forth in Section 3. If the Holder does not
convert all
outstanding amounts into Common Stock, the Company may redeem
any remaining
amounts at any time during a thirty (30) day period commencing
with the date of
expiration of the sixty (60) day period provided for in the
Redemption Notice.
Thereafter, the Company shall be required to provide the Holder
with a new
Redemption Notice, and the Holder shall have a new sixty (60)
day period within
which to convert all or any part of the outstanding principal
amounts plus
accrued and unpaid interest into Common Stock, as set forth in
Section 3.
5. ANTI-DILUTION.
(a) If at any time there is a capital reorganization of the
Company's Common Stock, including any combination,
reclassification, exchange,
or subdivision of shares, a merger or consolidation of the
Company with or into
another corporation, or the sale of all or substantially all the
Company's
properties and assets as, or substantially as, an entirety to
another person,
then, as a part of such reorganization, merger, consolidation,
or sale, lawful
provision shall be made so that the Holder shall thereafter be
entitled to
receive on conversion of this Note, during the period specified
in this Note,
the number of shares of Common Stock of the Company, or of the
successor
corporation resulting from such merger or consolidation, to
which a holder of
the Common Stock deliverable on conversion of this Note would
have been entitled
on that event if this Note had been converted immediately before
that event. In
any such case, appropriate adjustment (as determined by the
Company's board of
directors) shall be made in applying this Note to the rights and
the percentage
interests of the Holder after the reorganization, merger,
consolidation, or sale
to the end that this Note (including adjustment of the
Conversion Rate) shall be
applicable after that event, as near as reasonably may be, in
relation to the
shares of Common Stock deliverable after that event on
conversion of this Note.
The Company shall, not later than thirty (30) days prior to
making such
adjustment, give written notice ("Notice") by courier to the
Holder at the
address of Holder shown on the Company's books.
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(b) Any Notice that is sent pursuant to Section 5(a) shall
set forth, in reasonable detail, the event requiring the
adjustment and the
method by which the adjustment was calculated and shall specify
the Conversion
Rate then in effect after the adjustment and the increased or
decreased number
of shares of Common Stock to be received upon conversion of this
Note. When
appropriate, advance notice may be given and included as part of
the notice
required under other provisions of this Note.
6. CONVERSION RATE PROTECTION.
(a) If at any time, or from time to time, the Company issues
or sells shares of Common Stock without consideration or for a
consideration per
share less than the Conversion Rate in effect immediately before
that issue or
sale, then and in each such case:
(i) the Conversion Rate then in effect and the
Conversion Rate applicable for any subsequent period shall be
adjusted to a
price (calculated to the nearest cent) determined by dividing:
(y) the sum of
(aa) the number of shares of Common Stock outstanding
immediately before that
issue or sale multiplied by the Conversion Rate in effect
immediately before
that issue or sale, plus (bb) the consideration, if any,
received by the Company
on that issue or sale, by (z) the number of shares of the
Company's Common Stock
outstanding immediately after that issue or sale; and
(ii) the Holder shall after that issue or sale, on
conversion of this Note, be entitled to receive the number of
shares of Common
Stock equal to the number
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